In our last article we have discussed how to calculate fixed assets turnover ratio. In this article, we wants to measure how well the company has generated sales from its total assets during a particular period. As this ratio is a comparison of company’s total assets to the total revenue/sales, its known as total assets turnover ratio.
Total assets turnover ratio tells us how many times value of a company’s total assets is generated in sales during a particular period. It also shows you how effectively company selects and manages assets in optimizing its capabilities to add value by selling goods or services.
Formula to calculate total assets turnover ratio
Calculation of TAT ratio is very similar to fixed assets turnover ratio. Only difference is that, instead of taking fixed assets, you have to take all the assets of the balance sheet.
Total revenue/sales of the company is shown in theincome statement. Total assets are shown on its balance sheet.
Here is the formula to calculate:
Total assets turnover ratio = sales / total assets
A high ratio shows that the numerator (sales) is higher than the denominator (total assets) of the company. It means company is managing its assets effectively. Similarly, a low ratio indicates that the numerator is lower than denominator.
Company XYZ has following details in its income statement and balance sheet:
- Total turnover/sales = 10,000,000
- Plant, machinery and equipment = 6,000,000
- All other assets including cash, bank balance and inventory = 5,000,000
In this case, total assets turnover = 10,000,000/(6,000,000+5,000,000) = 0.91 times
This total assets turnover ratio of 0.91 indicate that every amount of money invested in company’s total assets generates 0.91 times of sales. It tells you how efficiently the management is using company’s assets to make money.
While taking a investment decision, you have to consider other relevant data and parameters before taking a decision.